Are Prosecutors Afraid of Big and Little Lab Firms?

Lab execs in California express puzzlement about the settlement terms in major qui tam case

CEO SUMMARY: Settlements in the big whistleblower suits involving major lab companies typically generate national headlines. But seldom do the views of the “quiet majority” of lab owners and lab executives get much attention. These are the majority of lab professionals working hard to follow compliance laws and requirements. They want to meet both the letter and the intent of the law. What follows is a sampling of the sentiments expressed by such individuals since settlement of the Medi-Cal qui tam lawsuit.

IT’S BEEN JUST SEVEN WEEKS since the nation’s second largest clinical laboratory company settled its whistleblower lawsuit in California that alleged violations of the state’s Medi-Cal billing laws.

During that time, the offices of THE DARK REPORT have fielded an interesting range of comments from executives, pathologists, and clinical laboratory managers about the outcomes of this qui tam lawsuit. Collectively, these individuals—most working in California—say they are puzzled about important aspects of this settlement.

Their questions and comments center around two themes. First, if, in fact, the State of California believed that the plaintiff laboratories had violated state laws on how to price services to the Medi-Cal program, why didn’t the Attorney General more vigorously press the defendant laboratory companies, even to the point of going to trial?

Further, they observe that, if state prosecutors were confident about their interpretation of these laws, what rebuttal arguments did the defendants put forth so that they avoided having to repay the full amount of the alleged overcharges, plus a penalty amount that would be significant and painful to the plaintiff labs? “Wouldn’t such full financial restitution and a hefty penalty send precisely the unmistakable message to the entire clinical laboratory industry that is wanted by state regulators?” they ask.

Interpreting State Law

In fact, that question ties into the second theme. These lab professionals bemoan the lack of a clear set of guidelines as to how the state will interpret and enforce these laws from this point in time. Those who have read the settlement agreements made public by the California Attorney General (AG) recognize how the language in the settlement specifies that each party reserves all its rights to assert its respective position in the future.

Thus, there is a general sentiment among more than a few of the owners and executives of independent laboratory companies that there is no language in the settlement agreement upon which they might base their compliance policies relative to applicable state laws. These executives uni- versally express that they would like reasonable confidence that the compliance policies of their laboratory are on the right side of the law.

The famous adage “You can fool some of the people all the time, and all of the people some of the time, but you cannot fool all of the people all the time,” was mentioned by one lab executive. It was his view that there is something wrong with a legal system that can extract $300 million in payments from defendant laboratories to resolve certain allegations that they violated the law, and at the same time not end up with language in the settlement that brings useful clarity to the law and how it will be interpreted and enforced by regulators and prosecutors in the state.

The Language of 51510(a)

This brings me to the point where I would like to offer some observations. At the heart of these concerns is the California Code of Regulations (CCR), Title 22, section 51501(a), which states in part:

Notwithstanding any other provisions of these regulations, no provider shall charge [Medi-Cal] for any service or any article more than would have been charged for the same service or article to other purchasers of comparable services or articles under comparable circumstances…

This language is an important element in the whistleblower case that was concluded with the recent settlements between the California AG and the defendant laboratories. You can decide for yourself how you would interpret this language and how you would align your lab’s sales and marketing practices to comply with your interpretation.

In the case of whistleblower and lab company owner Chris Riedel, his response was to file a whistleblower lawsuit that sought to recover money for the California Medicaid program. It was the absence of enforcement action and appropriate regulatory guidance by state officials which made such a qui tam lawsuit feasible.

So now, after six years of litigation and payments of approximately $300 million by the defendant laboratories, whistleblower Riedel has his vindication. Or does he? In the coming months, lab executives and lab owners in the Golden State will be watching to see what changes in the discount pricing schemes will be made by the defendant lab companies.

Great Frustration

As all of these comments demonstrate, the feedback we hear in our office is that there is great frustration out there by many laboratory administrators and clinical lab managers who earnestly want to do the right thing. But they consistently see lab companies in the marketplace willing to continually push the interpretation of state and federal compliance requirements in ways that give their lab organization clear competitive advantage.

It would be accurate to say that these lab professionals—who represent the hard- working, law-abiding citizens who support order and the rule of law—are disgusted with all the state and federal agencies where bureaucrats shy away from confronting so many of these compliance violations. “It seems regulators are afraid of taking on any lab, large or small,” noted one recent caller. “I find this to be a mystery, since we all know how much power a government agency has whenever it decides to enforce the law.”

Taking Personal Initiative

Maybe the lesson to be learned by these recent events is that it may be up to the lab industry to police itself, using the power of qui tam suits. Certainly the examples of C. Jack Dowden (National Health Labs, 1992, $111 million), Robert Merena (SmithKline Beecham PLC, 1997, $325 million), Thomas Cantor (Quest Diagnostics and Nichols Institute Diagnostics, 2009, $302 million), and now Chris Riedel (seven labs, $300 million, 2011), demonstrate that a common sense reading of compliance laws and regulations can lead to a successful enforcement action.


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